Now that John Rusnak is speaking to the FBI, it appears that he was not the
only one at Irish Allied Bank who was involved in trying to cover up bad
currency trades. Five others seem to be involved, too. It seems to be
similar to Nick Leason's experience when trading for Barings Bank in
Singapore some years ago.
On BBC Newsnight last night, there were some interesting observations from
various people who know a thing or two about about currency trading. The
following struck me as being salient:
1. One who'd been a currency trader for several years said that, even after
stricter controls had been brought in by all banks since the Nick Leason
episode, many currency traders are able to hide bad trades. He implied that
it is still going on widely, despite the present furore.
What seems to be going on is this: a currency trader, usually a young and
ambitious young man, makes a judgement of the movement of one national
currency against another. So he buys a very large amount of one currency --
maybe a few hundred million dollars or whatever. If his judgement turns out
to be correct he might possibly make a 1% profit on this for his bank. But
he could also make a similar size of loss if the target currency goes the
wrong way. Even though the profit or loss is 'only' of the order of 1% of
the total traded, it can be quite large, and a loss, or series of losses,
doesn't endear him to his superiors at the bank nor, ultimately to the
shareholders of the bank. So a currency trader is enjoined to guard against
losses when doing a trade by simultaneously placing another bet (an option)
against his original bet which will *largely* cover him if his judgement
turns out to be wrong. So the net result of his double bet is a loss or
profit which is very much smaller -- let's say 0.1% of the principal
originally traded.
However, if a trader makes a net loss after this double-trade or a series
of losses he is strongly tempted to make a subsequent trade without also
placing an option so he can recover his position. If this trade also makes
a loss (now much larger than previously) he is tempted further to make
single-sided trades. These losses can often accelerate if the trader starts
panicking in an attempt to recover his position before the bank auditors
find out.
The benefit of currency trading to a bank is that it can largely ensure
that the large balances of currencies that it always happens to have at any
one time can be guaranteed not to lose too much value if one or other
currencies becomes volatile on the world's exchanges. With luck, the bank
might make a small profit. So every bank has a bearpit of young traders
doing all this currency trading for it. Some traders might in fact make
generally good judgements over a period of time and so they're likely to be
promoted in due course -- and/or to receive good bonuses.
(Even as I'm writing this, Nick Leason is on the radio and saying that he
is 'frightened' that, even now, the banks don't have enough controls to
prevent young traders from getting into trouble.)
. . . back to Newsnight last night:
2. Another expert said that whatever controls banks might institute now or
in the future there will always be ways in which traders can evade them if
they need to. Furthermore, similar misjudgements are constantly going on
but the banks don't reveal them for publicity reasons. Furthermore,
although John Rusnak had probably made a series of misjudgements and was
probably not trying to defraud his bank, it would be possible to do so if
he conspired with another trader at another bank somewhere in the world. In
this way a profit could be created at one bank or the other and then
shifted into a secret account somewhere else.
3. Another expert said that the amount of daily currency trading going on
around the world is something like 50 times the actual amount of currencies
that are being traded for strictly trade purposes.
What are we to make of all this? It is that while we continue to have
national currencies which are capable of moving rapidly against one another
on the basis of events, rumours or decisions of politicians, then there
will always be disasters such as occurred at Barings and Allied Irish Bank.
Keith Hudson
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�Writers used to write because they had something to say; now they write in
order to discover if they have something to say.� John D. Barrow
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Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED]
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